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Third most of policy lending non performing loan of

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Unformatted text preview: ally turned to be NPLs. Second, many of the loans made in the 1980s were used to support the industrial policy. Although the enterprises receiving the loans in some cases were unprofitable under the technology they had and the prices that prevailed, the loans were successful in terms of promoting the development and modernization of important industries. In the 1980s, the Santana cars assembled by Shanghai-Volkswagen were very expensive comparing with the cars made in Japan, as most of the parts were imported from Volkswagen. However, the policy loans that were used to establish Shanghai-Volkswagen helped to develop China’s automobile industry in the long run. Third, most of policy lending Non-Performing Loan of China’s Banking System 143 made in the 1990s was aimed to save SOEs from liquidation. In the industries like textiles, heavy machinery, electrical equipment, mining and so on, which were traditionally dominated by SOEs, the equipment and knowledge were twenty-five or more years out of date in the 1990s. The products produced by these enterprises were so obsolete that their prices did not even cover their material cost of production. This means that these SOEs should be shut down. However, the government still supported them through policy lending since before reform the social function of employment, income, housing, health care, children’s education and retirement pensions are all provided by SOEs. To abandon this system and close SOEs overnight could have produced the poverty, reduced life expectancy, despair and chaos which was experienced by the former Soviet Union when the old planned economic system collapsed. The policy lending was consequently used to achieve the objective of modernizing its industry as rapidly as possible while balancing the conflicting objectives of minimizing the hardships imposed on its workers, and maximizing the incentives or pressures to make the needed adjustments. Therefore, the banks involved have acted primarily as government agents, disbursing funds to a variety of pre-determined projects without any preliminary credit analyses. Such analyses were never performed, nor was there thought to be any need for them, since all credit terms including the amount of the loans, loan maturity, interest rates, and so forth, were pre-determined by the government. Under the “policy lending” guidance, poor documentation for loan collateral was common, and credit risk management skills were far from meeting international standards. Such a system could not help but generate irrational investment decisions, and these decisions frequently resulted in non-performing loans. In 1994, the Chinese government established three policy banks that took over the policy l ending tasks from the SOCBs, leaving the latter with more healthy capital to develop a commercial lending orientation. The administration also established a legal basis for commercial banking with the promulgation of the Commercial Banking Law in 1995. Moreover, as the e conomic reform prog...
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